The drama, emotion and chaos accompanying a dissolution can often cause a couple to ignore and overlook the business and tax aspects associated with dissolving their marriage. There are at least three major areas of tax considerations in a dissolution of marriage. It is important to understand and be prepared for tax issues in divorce:
Claiming an Exemption of a Minor Child
A dependency exemption works like a tax deduction and a parent is entitled to take such an exemption for each child they support. If you qualify to claim one or more child exemptions, you will end up paying less tax. This exemption usually goes to the custodial parent in a dissolution and cannot be split.
When the custodial parent has little or no income, it may make more sense for that parent to release the exemption to the non-custodial parent. This could be negotiated and agreed by the parties and be part of a marital settlement agreement.
However, the parties should always keep in mind that the IRS rules are superior to state court judgments regarding exemptions. The IRS requires that form 8332 be signed and attached to a tax return if a custodial spouse wishes to give up the exemption.
Child support payments can neither be deducted nor included in income on state or federal income tax returns (IRS rules 71©(1)-(2) and 215(a)-(b)).
Spousal support can be a good news, bad news scenario when it comes to taxes depending on the perspective of the parties involved. Spousal support payments are generally deductible by the payor and reportable as gross income by the payee. Internal Revenue Code section 71 and 215 provide the basic foundation for this rule. California state law in Rev & T Code section 17081 and 17201 conforms to federal law.
The after tax effect of spousal support payments somewhat lessens the burden that these court ordered payments often cause. On the other hand, the spouse receiving such payments may be burdened by having to report the receipt of spousal support and subsequently pay taxes on the payments. The underlying consideration is obviously the respective income and thus, tax filing status of each of the parties.
Other Important Tax Issues in Divorce
- A joint return cannot be filed for the spousal support to be includable and deductible.
- The spousal support payment must be in cash or a cash equivalent to be includable and deductible. Transfers of services, property or debt and/or use of the payer’s property do not count as includable and deductible payments.
- The spousal support payments must be received under a judgment, written agreement or order for them to be includable and deductible.
- If a judgment has been entered for the payments to be includable and deductible the parties cannot be part of the same household.
- Each payment must be made under a qualifying instrument and written agreement signed by the parties before the payment becomes includable and deductible.
The Family Law Attorneys at Wallin & Klarich Can Help You with a Divorce
Both the tax issues in divorce, and the benefits caused by a dissolution of marriage can be significant. It is important that you understand these issues before you file your taxes and it is too late. That is why you need an experienced family law attorney who will help you through every step of the legal process.
At Wallin & Klarich, we have over 30 years of experience helping clients with family law matters such as divorce and spousal support. Our skilled attorneys will help you obtain the best possible outcome in your case and make sure you understand every aspect of you family law issue.
Our offices are located in Los Angeles, Sherman Oaks, Torrance, Tustin, San Diego, Riverside, San Bernardino, Ventura, West Covina and Victorville. Call us today at (888) 749-7428 for a free phone consultation. We will be there when you call.